Dave Camp’s Tax Plan: A Brave Start But Lots of Gimmicks

Give House Ways & Means Committee Chair Dave Camp (R-MI) all the credit in the world for years of hard work developing his tax reform plan. Just don’t look too hard at the blueprint, which he released this afternoon.

On one level, it is a serious framework for reform. For individuals, it would consolidate and cut tax rates. According to the Joint Committee on Taxation, it would distribute the tax burden in roughly the same way as today’s law and raise about the same amount of money over the next decade. There is nothing magic about accomplishing either of these goals, but it is not easy to do and they provide a useful starting point for the reform debate.

However, the plan would get there through a combination of real cuts in tax preferences and an unsettling collection of gimmicks and fiscal legerdemain. And for a plan that is being billed as tax simplification, it is incredibly complicated—filled with phase-ins, phase-outs, surtaxes, and hidden tax rates.

Camp would eliminate the deduction for state and local taxes, cap the home mortgage interest deduction for loans in excess of $500,000, trim the Earned Income Tax Credit, end Head of Household filing, and repeal scores of smaller tax deductions and credits. These are real cuts in real tax preferences. And, whatever you think of their merits, Camp is finally taking the debate beyond the silly claim that rates can be cut be eliminating “loopholes.”

He’d also kill the Alternative Minimum Tax and redesign the taxation of capital gains and dividends. The first 40 percent of this investment income would be excluded from tax but the rest would be taxed at ordinary income rates. These too are important changes.

On the other hand, Camp claims he’s crunched the current seven-rate individual tax system to two rates 10 and 25 percent, a long-stated goal of many GOP leaders. But he really has three: 10 percent for single filers making less than $35,600($71,200 for joint filers), 25 percent for those making up to $400,000 ($450,000 for couples), and 35 percent for those making more than that.

But the story gets a lot more complicated—and more costly -- for many households. For instance, the plan would repeal the personal exemption. It would significantly raise the standard deduction for most taxpayers but phase it out for high-income households. It would also phase out the benefit of the 10 percent bracket and cap itemized deductions. All these changes would boost effective tax rates.

The 10 percent surtax on high-income individuals is in addition to the 3.8 percent levy on unearned income that was adopted as part of the 2010 Affordable Care Act (which Camp retains). In addition, the surtax would apply to income that is currently untaxed, such as the value of employer sponsored health insurance and the health deduction for the self-employed, municipal bond interest, untaxed Social Security benefits, and 401(k) contributions.

He’d also backload tax benefits for retirement savings. He’d bar new contributions to traditional and non-deductible IRAs but at the same time make everyone eligible to contribute to Roth IRAs. This would generate revenue in the early years since contributions would not be deductible. But because distributions from Roths are tax-free, such a design would increase future deficits by billions of dollars.

In all, Camp deserves a ton of credit. He’s spent years working on a reform plan. He toured the country promoting the idea and spent countless hours teaching fellow House Republicans what rewriting the code really means. Camp soldiered on despite a serious illness and severe constraints imposed by his own party leadership. In the end, House GOP bosses won’t even try to pass his bill.

And he did it all even though party rules will force him from the Ways & Means chairmanship at the end of this year. Yet, he persevered.

In the end, the details of Camp’s plan are less important than the fact that he wrote a plan. His framework, like the ones proposed by President George W. Bush’s orphaned tax reform commission, the Bowles-Simpson fiscal commission, the Bipartisan Policy Center, and others will help inform future efforts to rewrite the code. Think of Camp’s plan as one big step down a very long road.

20Comments

Jack Gallagher :: 5:29 pm on February 26th, 2014:

Howard,

I’m guessing then that the blueprint is not revenue neutral?

Deb :: 6:58 pm on February 26th, 2014:

It’s supposed to be revenue neutral. But like Howard says, it’s full of gimmicks. This is nothing but a way to cut the top bracket’s income rates. Even if the current proposal is supposed to close loopholes, it also introduces the possibility of new ones down the line. Let’s not be naive enough to imagine this will be the end of modifications to the tax code any time soon.

Jack Gallagher :: 7:16 pm on February 26th, 2014:

Deb, the quick math I just did with respect to the high income bracket individuals for whom I prepare tax returns shows that they will pay a lot more in total income tax. Even with a rate reduction of 4.6 percentage points, and even without the alt min tax, they will pay more due to the removal of exclusions from income (401k contributions, employer paid medical insurance) and reduction in itemized deductions (mortage interest beyond $500,000 in debt). The switch in long-term gains & dividends to a 40% exclusion (rather than a different, lower tax rate of 20%) will also add to their tax bill.

Howard Gleckman :: 7:51 pm on February 26th, 2014:

JCT says it is revenue neutral, at least in the 10-year budget window.

AMTbuff :: 8:17 pm on February 26th, 2014:

The plan cuts 401k and similar deferral limits in half, with the other half forced into Roth. The Roth accounts will cost the Treasury more in future years, offsetting the temporary revenue gain. But let’s live for today! Next year it will be another Chairman’s problem.

Furthermore, the halved 401k pretax contribution limits are frozen (not indexed to inflation) for 10 years. If we have a big spike of inflation, well, so sorry about that. Besides, a stealthily creeping reduction in tax benefits is far preferable to an above-board immediate cut. That way younger workers can pay the higher taxes longer without harming the poor darling Baby Boomers. How can you argue with that?

I mean it’s not as if 55-year-old Boomers need to save more for retirement, is it? We would never consider means testing their benefits, so saving is pointless, right?

Howard is right. Gimmickry abounds. Again, that’s the most durable legacy of the 1986 Tax Reform.

Yet the fundamental error here is that lower tax rates are a red flag to Democrats. As soon as they can, they will not be able to resist putting the rates back up where they were, if not higher. The deductions will remain curtailed. No grand bargain and certainly no Tax Reform can withstand a political party that gains the ability to renege on the deal.

This game has been played once already. The 1986 Tax Reform had full effect for only 5 years (1998 to 1992) before its low rates were history. It’s almost as if Camp and his Camp followers intend to enable that big tax increase a few years from now.

jim jaffe :: 8:45 pm on February 26th, 2014:

sounds like a commendable effort, but to what end. if we all end up paying about the same in taxes as we do now and our behavior remains about the same (in terms of purchasing houses, saving for retirement, giving to charity, etc). then what is the purpose of this effort which would be a heavy lift in any event. From a philosophical perspective, you can argue for a VAT, which would change economic incentives and perhaps behavior. But it isn’t clear to the goal of this effort is beyond achieving tax reform. As Howard and others correctly say, it is complex. Fact is our lives are complex and complexity is baked into the code.

AMTbuff :: 9:17 pm on February 26th, 2014:

I ran some preliminary numbers today. I’d pay 30% more federal tax, mostly due to complete loss of deductions for state and local taxes and the plan’s 50% reduction of pretax retirement plan contributions. There is a simplification in that I’d finally be taking the standard deduction, but that’s not worth a 30% tax increase.

What’s more frightening is to consider that California and most other states would be certain to adopt Camp’s newly expanded definition of taxable income without reducing the state income tax rates. My state income taxes would increase by more than 30%, with no federal deduction to soften that blow.

These increases are without anything exceptional on my tax return. Just regular old itemized deductions and pretax retirement contributions at the current maximum. Yet Camp wants to soak me, a perfectly ordinary taxpayer using perfectly ordinary tax breaks.

Incidentally, Camp’s rate structure has a bubble, just like the 1986 Tax Reform Act. Without considering phase-outs (e.g., assuming only the standard deduction is used) the rates are 10%, 25%, 30%, 40%, then 35%. The 30% and 40% result from phaseout of the benefit of the lowest bracket at a 5% rate, same as in the TRA86.

The 30% rate starts are $300k MAGI and ends at $513.6k MAGI, where MAGI adds back employer-paid health care and pretax retirement contributions plus all the other items traditionally included in MAGI. In effect, the 5% bubble tax is a tax on gross income, not on taxable income. I regard such taxes as fundamentally dishonest and unprincipled.

How dispiriting. If this sort of chicanery is the best we can do with Tax Reform, let’s just bury it without a marker.

Michael Bindner :: 12:48 am on February 27th, 2014:

He will likely take flack from both the right and the left on this one. It will be interesting to see whether this survives to get out of committee and whether it goes to the floor and is voted on. He does deserve credit for sticking his neck out and making some hard choices – as well as keeping the discussion going and allowing those of us who have our own plans to get them on the record yet again. Cutting the EITC is DOA with POTUS, so we will see if Camp et al are open to compromise and whether the Administration lets the Office of Tax Policy fully engage on this plan. This could be a last shot across the bow or it could be the start of actual change this year (or part of his bid to seek an additional term as chair rather than handing it over to Ryan – who also has reform plans of his own). We live in intersting times for tax reform.

Bob :: 8:02 am on February 27th, 2014:

Who cares, really? The odds of getting anything like this done in short or even medium term are close to zero. Both parties love the tax code in current form as it permits them to hand out goodies to their favored constituencies, no matter the cost to taxpayers in terms of preparation fees and time spent managing paperwork.

As long as the tax code works for Washington, there will be no substantive “reform” much less “simplification”.

Next topic, please.

Jack B :: 8:27 am on February 27th, 2014:

Another plan to put on the shelf. Better get busy building shelves.

Kevin :: 9:54 am on February 27th, 2014:

LOL the mortgage interest deduction… So we take a deduction that whose benefits are already heavily skewed towards upper income households (those least in need of an incentive to purchase a home) and give it to only the top 5% of earners??? If the goal is to promote home ownership for those who might not otherwise purchase one, why not make this an above the line deduction capped at a low level of AGI. If the goal is to placate the real estate lobby, I suppose this is a good plan.

[…] Camp’s corporate tax cuts are carefully hidden by budget gimmicks to make his legislation appear fiscally responsible at first. These gimmicks are enough to mask […]

Jack Gallagher :: 11:30 am on February 27th, 2014:

Kevin, what are you referring to? This blueprint eliminates the mortgage interest deduction for the portion of loans in excess of $500,000 (current maximum loan amount is $1,100,000). How much lower do you propose? I imagine, whatever threshold you come up with, there will be a number of people who own modest three bedroom homes in California, New York and northern New Jersey who won’t take kindly to your idea of reform.

February 27, 2014 War on Workers News :: 2:23 pm on February 27th, 2014:

[…] Camp’s corporate tax cuts are carefully hidden by budget gimmicks to make his legislation appear fiscally responsible at first. These gimmicks are enough to mask […]

Tax Reform: one foot in front of the other :: 2:05 am on March 1st, 2014: